The Importance of Offense & Defense in Volatile Markets

by | Apr 11, 2025 | Insights

It’s no secret at this point that global markets are experiencing heightened volatility due to escalating trade tensions. As China implements retaliatory tariffs, fears of a full-scale trade conflict and potential recession have intensified. This uncertainty has triggered declines across international markets and driven investors toward safer assets, pushing bond prices up and yields down. At the same time, President Trump’s recent announcement instituting a 90-day pause on tariffs for all countries excluding China sent markets roaring higher, creating a further whipsaw and additional volatility both on the upside and the downside. Market fluctuations to this degree can be challenging to navigate in the short-term.

Market conditions highlight the need for strategic portfolio management

Successful investing can be compared to competitive sports in the sense that both require mastering offensive as well as defensive strategies. A defensive approach means structuring portfolios to weather various market environments and unexpected events. This foundation of resilience is essential given the inevitability of market fluctuations.

Offensive strategies involve identifying and capitalizing on market opportunities during periods of change. While market uncertainty can be unsettling, these periods often present compelling valuations to consider putting money to work. The key to long-term success lies in balancing both defensive protection and offensive opportunity capture.

The accompanying chart above helps illustrate two fundamental investing principles: (1) diversification and (2) time horizon management. Historical data shows the range of returns across different asset types and portfolio combinations over various time periods. For example, single-year stock market returns have ranged from a 60% gain in 1983 following stagflation concerns to a 41% decline during the 2008 financial crisis.

The benefits of diversification become clear when examining broader portfolio allocations. A balanced portfolio with 60% stocks and 40% bonds has demonstrated more stability than pure stock exposure. This year’s market performance highlights this effect – while the S&P 500 has declined over 10%, a balanced 60/40 portfolio is only down about 5% or less.

Investment success isn’t just about maximizing returns – it’s about strategically managing risk while reliably achieving financial goals. Diversified portfolios historically show more consistent outcomes, enabling more predictable financial planning.

The power of extended time horizons is also evident in the data. Since World War II, there hasn’t been a negative 20-year return period for any of these portfolio combinations. Many diversified allocations show similar stability over 10-year periods. While past performance doesn’t guarantee future results, this demonstrates the advantages of maintaining a long-term mindset.

Market uncertainty can create attractive entry points

The VIX index, which measures market volatility (i.e., fluctuations), tends to spike during periods of market stress, as seen in 2008 and 2020. These episodes often coincide with peak investor anxiety and a sense that markets may not recover.

Looking at subsequent market returns reveals that periods of extreme fear often precede significant opportunities. This pattern reflects Warren Buffett’s famous advice to “be fearful when others are greedy, and greedy when others are fearful.”

This relationship is particularly relevant during liquidity-driven market stress, where forced selling by leveraged investors can create price dislocations despite unchanged fundamentals. These scenarios can create opportunities for patient investors when short-term market movements diverge from true long-term value.

However, it is important to note that this observation is not meant to encourage market timing. High VIX readings don’t guarantee immediate market recoveries. Rather, investors should consider this pattern when maintaining their strategic asset allocation. Market declines often improve valuations, potentially supporting the case for maintaining or increasing exposure to affected assets, depending on individual circumstances. As an example, periods of market volatility can create opportunities to rebalance your portfolio back to your target allocations (% stocks vs. % bonds). In the current environment with equities down significantly and bond values up, rebalancing may allow investors to reduce bond exposure and reallocate to equities while prices are lower and more attractive.

Market conditions have improved certain valuations

The current market environment has certainly highlighted the diversification benefits of bonds, which have appreciated in value as yields declined, helping offset losses in other assets. This inverse relationship with stocks, often described as bonds “zigging when stocks zag,” demonstrates why uncorrelated assets are valuable for portfolio protection.

Current market conditions have also created more attractive valuations following years of strong returns. While earnings implications from tariffs remain uncertain, the S&P 500’s price-to-earnings ratio has decreased to 20.7x. Technology, Communication Services, and Consumer Discretionary sectors have experienced particularly notable multiple compression.

Across other asset classes, we have seen commodities (specifically gold) provide diversification benefits given the uncertainty, while Small Cap and Mid Cap Stocks have struggled. This underscores the importance of maintaining broad diversification rather than concentrating in any one or two asset classes.

The bottom line? Successfully navigating market uncertainty requires both defensive positioning and readiness to capture opportunities on offense. A well-constructed, diversified portfolio aligned with long-term ambitions remains the most reliable path to achieving financial goals.

Investment Advisor Representative of Sanctuary Advisors, LLC. Advisory services offered through Sanctuary Advisors, LLC., a SEC Registered Investment Advisor. Tenet Wealth Partners is a DBA of Sanctuary Advisors, LLC.

The information provided in this communication was sourced by Tenet Wealth Partners through public information and public channels and is in no way proprietary to Tenet Wealth Partners, nor is the information provided Tenet Wealth Partner’s position, recommendation or investment advice.

This material is provided for informational/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Investments are subject to risk, including but not limited to market and interest rate fluctuations.

Any performance data represents past performance which is no guarantee of future results. Prices/yields/figures mentioned herein are as of the date noted unless indicated otherwise. All figures subject to market fluctuation and change. Additional information available upon request.

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About The Author

Kevan Melchiorre, CFP®Co-Founder & Managing Partner

Kevan Melchiorre co-founded Tenet Wealth Partners in 2021 with a focus on delivering a premier client experience, supported by an innovative and fully integrated approach to wealth planning. As a CERTIFIED FINANCIAL PLANNER® practitioner with over 16 years of wealth management experience, Kevan partners with affluent individuals, families, and institutions to help align their capital […]

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